Your Finances: New health care trend starts with savings plan

Saturday

Nov 10, 2012 at 2:00 AM

This is the time of year when many companies offer open enrollment for employee benefits. In this era of rising health care expenses, one of the trends in the employee benefits arena is toward high-deductible health plans.

Laura Medigovich

This is the time of year when many companies offer open enrollment for employee benefits. In this era of rising health care expenses, one of the trends in the employee benefits arena is toward high-deductible health plans.

High-deductible health plans, or HDHPs, work hand in hand with health savings accounts, HSAs. An HDHP is considered catastrophic health coverage that pays benefits only after you have satisfied a high annual deductible. Once the deductible has been satisfied, the HDHP will provide comprehensive coverage for medical expenses.

A qualifying HDHP must limit annual out-of-pocket expenses (including deductibles) to no more than $6,250 for individuals and $12,500 for family coverage in 2013. Once this limit is reached, the HDHP will cover 100 percent of your costs, as outlined in the policy.

To help defer the costs of the high-deductible health plan, you can contribute money to a health savings account, which is a savings account used to set aside money tax-free to pay for health care expenses. An HSA can be set up at many financial institutions. In 2013, you can contribute up to $3,250 toward individual coverage and up to $6,450 toward family coverage. Some employers make contributions to HSAs to further defer employee costs. This annual contribution limit applies to all contributions, whether by you, your employer or a family member.

There are several advantages to high-deductible health plans. First, since you are responsible for a greater portion of your health care costs, you will usually pay a much lower premium than you would for traditional health insurance, allowing you to contribute the premium dollars you're saving to your HSA. Then, when you need medical care, you can either withdraw money from the HSA or choose to pay out of pocket.

Another advantage is that the HSA does not have a "use it or lose it" provision. Money rolls over from year to year, and the account is portable — if you change employers, it still belongs to you. If your health expenses are low, it is possible to accumulate a significant amount in your HSA. You can even let your account grow until retirement, when your health-related expenses could be much higher.

Additional benefits of an HSA include tax-deferred growth on any interest or earnings, and tax-free withdrawals if used to pay qualified medical expenses. Contributions can be made on a pretax basis, and if you make after-tax contributions, they're deductible from your federal income tax whether you itemize or not. Remember, the goal of an HSA is to pay for health care. If you withdraw and use the money for non-qualified expenses, you will be subject to a 20 percent penalty.

High-deductible health plans and health savings accounts are becoming more popular as employers are looking for ways to assist their employees with health care costs while managing expenses.

Laura Medigovich is a certified financial planner and vice president for M&T Bank's Hudson Valley region. The views expressed by the author are her own and are not endorsed by M&T Bank, M&T Securities or their affiliates.